Insys Therapeutics is a company in a great deal of trouble.
The manufacturer of a Fentanyl spray called Subsys that clocks in at 100 times the strength of morphine, the Chandler, Az.-based Insys was the top-performing initial public offering of 2013. Analysts and investors adored the company’s fast sales and profit growth and dreamed of a future when its cash flow led to dividends and acquisitions.
As Insys’ market capitalization topped $3 billion, the milestones began to sail past for those who were in on the ground floor — founder Dr. John Kapoor became a billionaire and a host of company insiders, led by chief executive officer Michael Babich, became millionaires.
Their joy was not to last.
[drizzle]It wasn’t long before the subpoenas began to pile up, with state and federal prosecutors from both coasts swinging into action; the U.S. Attorney’s office in Boston, for example, empaneled a grand jury — and grand juries rarely fail to return indictments. That’s not the end of it: Insys’s most frequent prescribers continue to be indicted and key executives have departed without notice.
Then came the lawyers.
In August Oregon’s Department of Justice struck a $1.1 million settlement with Insys that represented about twice its revenues in the state (in April the company settled a class action for $6.125 million.)
The Oregon settlement is stark reading, using depositions and emails to claim that the company misrepresented a key scientific study, encouraged off-label prescriptions (allegedly in violation of Food and Drug Administration guidelines) and ran its speakers program solely to reward frequent prescribers.
While Insys’ investors haven’t thrown in the towel–the share price is up a split-adjusted 50% in the past year (in some measure because Kapoor and his family’s trusts control 66% of the shares outstanding,) some cracks are beginning to show.
On November 2, CEO Mike Babich suddenly resigned on the eve of an earnings announcement — traditionally a major red flag for investors. Kapoor, who assumed the CEO title, told those listening on the conference call that “Mike decided that now is the best time to turn the page and focus on his family as well as pursue new opportunities.”
There’s more to the story than that though.
Babich was forced out by Kapoor, according to a senior Insys executive who was in regular contact with him in the days prior to the announcement. While both men are the subject of intense regulatory scrutiny, the founder and chairman bluntly told his lieutenant of 14 years that he was closest to the issues federal prosecutors are looking at and that a change had to be made should settlement talks became serious.
While Babich will be spending time with his young family, that’s also more complex.
Earlier this year, Babich began a relationship with Natalie Levine, a then Boston-area Insys sales executive, who soon became pregnant; they were married in the summer. Putting aside the unusual optics of a CEO of a publicly-traded company dating someone who reports to him–this was his second romance with a sales colleague; Kapoor has also dated two sales executives–there is another angle to their relationship to be considered.
It’s a sure bet the newlyweds will be monitoring the developments in a rapidly expanding criminal suit in the U.S. District Court in Hartford where Heather Alfonso, a nurse who was a high-volume Subsys prescriber for the past two years, pled guilty to accepting $83,000 in kickbacks. Federal prosecutors, in the transcript from the July plea hearing, allege that the kickbacks induced her to write $1.6 million worth of Subsys prescriptions.
What appears to have brought the wrath of federal prosecutors down upon the divorced mother of four was the baldness of the scheme. According to her plea, Alfonso was paid $1,000 each time she attended a series of Insys speaker’s programs, where she was supposed to discuss her clinical experience with Subsys to other medical professionals. In reality, however, no other prescribers were present and prosecutors said the events were nothing more than Insys-sponsored dinner and drinks for Alfonso and her co-workers.
Natalie Levine was one of the sales staff who called on Alfonso, and arranged and attended many of the 70 separate speaker program events. Babich, as the CEO, approved two years worth of budgeted payments to Alfonso.
(An interesting wrinkle: courts have traditionally recognized a spousal privilege and have declined to compel husbands and wives to provide testimony about each other, but the events in the Alfonso case occurred before Levine and Babich were married.)
As is expected for someone looking at a sentence of 46-57 months, Alfonso is cooperating with the government; her sentencing date has been pushed back twice, most recently for six months. In the plea transcript prosecutors offered a pretty big clue about where Alfonso’s cooperation may be taking the investigation. For example, several patients whom prosecutors described as Medicare Part D beneficiaries are ready to testify that she diagnosed them with issues other than breakthrough cancer pain (Subsys’s primary indication) yet insurers still authorized the prescriptions.
As described in the transcript, Insys’ prior authorization unit changed Alfonso’s diagnoses to cancer. Absent the alleged change, the prosecutor asserted, the insurers would have never paid for the prescription.
It is the first public explanation of the issue the Southern Investigative Reporting Foundation wrote about in July: Medicare and commercial insurers appear to approve Subsys prescriptions at vastly higher rates than those of its rivals in the Fentanyl marketplace.
The Southern Investigative Reporting Foundation spent the better part of a year reporting on Insys and our findings suggest that the federal prosecutors are on to something. The prior authorization unit was set up to assist patients with complex insurance paperwork. Its value proposition was simplicity itself: the patient signs a few forms and Insys handles the messy paperwork. Patients would get the medicine, prescribers wouldn’t have to scramble for a replacement and Insys would book thousands of dollar in revenue per prescription.
In reality what the PA unit did was take advantage of pharmacy benefit manager inertia to generate a type of bureaucratic alchemy, wherein a torrent of off-label Subsys prescriptions would be transformed into medically urgent cancer diagnoses.
Unmistakably, the PA unit a the key piece in helping Insys double the size of the Fentanyl marketplace to over $500 million in under two years.
Lost in the cascade of prescriptions, however, is the human toll from peddling Subsys like a new piece of software or an improved detergent. Since the drug launched in January 2012, the FDAs Adverse Events Reporting System lists 203 deaths where medical providers fingered Subsys as the probable candidate for triggering an adverse reaction. Moreover, the pace of purported Subsys-related deaths is accelerating, with FAERS disclosing 52 deaths in the second quarter alone.
(It bears noting that FAERS data is not definitive: it relies on voluntary medical-provider reporting so it may undercount actual incidents. Additionally, most reports represent a medical professional’s assessment and are not an official cause of death.)
These deaths are framed against a backdrop of a nationwide opioid abuse epidemic. According to the Centers for Disease Control, in 2013–the